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Student loans may seem simple on the surface, but borrowers may face some complexities during the financial aid lending process.
One of the biggest points of confusion among student borrowers is where the money goes after financial aid is approved. Disbursement of student loan funds is not as straightforward as receiving a check in the amount of your new loan. It involves much more than the lender simply handing over the cash to the student.
In this article, we go over what student loan disbursement is, how it works for both federal and private student loans, and some of the complications that can arise throughout the financial aid disbursement process.
On this page:
- What is Student Loan Disbursement?
- Federal Student Loan Disbursement
- Private Student Loan Disbursement
- Complications Related to Refinancing & Consolidation
What is Student Loan Disbursement?
Student loan disbursement is how a lender provides your loan proceeds—or the amount of the financial aid you are approved for—to the school for payment of qualified education costs. But it starts long before the loan money is handed over from one party to the next.
Student loan disbursement begins when you apply for student loans. The lender reviews your application details, either through the FAFSA or through a private lender application, and determines if you are a good fit for receiving student loan funds.
For federal student loans, this is based on your enrollment, your dependency status, and your year in school. For private student loans, whether you’re approved during the application process relies heavily on your credit history, income, or whether a co-signer is available.
Once your application is approved, the funds are then transferred from the lender to the school, not directly to you or your bank account. This amount of money from a federal or private loan is used by the school to cover fees, including tuition, room and board, and other fees associated with enrollment.
The remaining loan amount is disbursed to the student borrower’s bank account. In many cases, the “excess” funds are used to cover living expenses, like rent, gas, and utilities.
>>Read More: Handling Student Loan Money Without a Bank Account
While this is the general way student loan disbursement works, there are differences between federal and private student loans. The details below offer more insight into how student loans are disbursed if they are from federal or from private lenders.
Federal Student Loan Disbursement
Federal student loans are disbursed through the Department of Education, so there are several regulations in place to ensure a minimal amount of fraud or confusion.
The most popular federal student loans are Direct Loans, including Direct Stafford Loans and Direct PLUS Loans. When federal loans, such as Direct Subsidized or Unsubsidized Loans, are approved, the U.S. Treasury Department transfers the funds to the Department of Education. From there, the U.S. Department of Education sends the loan proceeds to the student’s university or college.
Once the school receives the money, federal student loan funds are then used to cover school-related expenses. Tuition and other fees are paid from the loan. If there is an amount left over, the student borrower receives these funds as a form of a refund. These funds are then used to pay for whatever the student needs, or paid back to the student loan servicer if not needed at all.
Once a federal student loan is disbursed, there is a 120-day timeframe where the loan can be canceled. If a student borrower cancels the loan within this period, there are no interest or fees associated with the loan.
Additionally, federal student loan disbursements come with other stipulations. For instance, first-year undergraduate students or first-time federal student loan borrowers must wait 30 days after the enrollment period begins before a disbursement is made. This rule is put in place by most colleges and universities, so check with your school to understand whether this delay applies to you.
Also, first-time borrowers must complete entrance counseling before they can receive the initial student loan disbursement. Entrance counseling is also a requirement for graduate and professional students who take out a PLUS loan for the first time. This process is completed online, but it is important that first-time borrowers go through with the brief requirement.
Private Student Loan Disbursement
Private student loan lenders handle loan disbursements differently. Each lender may have a different way that loans are provided after the initial application and approval process is complete. Private student loans are approved based on credit history, income, and cost of attendance. Once a student is approved for a loan, the process may involve a direct transfer to the student as a direct deposit into a bank account, or a school certification.
Direct-to-student, or direct-to-consumer, private student loans are disbursed to the student, not the school. The lender does not need to certify the loan with the school, but this puts the student in charge of using the funds to pay for fees and tuition in full. The borrower is responsible for making the necessary payments to their school’s financial aid office.
The process for a school-certified private student loan works similarly to federal student loan disbursement. The lender approves the loan and then sends the proceeds directly to the school. The school confirms the student’s enrollment status and the anticipated graduation date, and in some cases, the cost of attendance. Schools can certify the loan as it is, or request changes based on the student’s status. This process can delay when the funds are received on behalf of the student.
Once the loan is certified, funds are then sent to the school. Tuition and fees are paid, and a refund check for the remaining balance is sent to the student from the school. In most cases, private lenders let students know when funds have been paid to the school. Then, they are aware that a refund check of the remaining amount should be on its way.
Students using private student loans should check with the lender to see if they require the certification process or if they should be expecting a check to cover the expenses of their education. The process is different for each lender, so learn these details in advance.
Complications Related to Refinancing & Consolidation
Although student loan disbursement through either private lenders or the federal government is fairly straightforward, complications can arise. This is particularly true when students refinance or consolidate their student loans to change their monthly payments.
Loan disbursements from both the federal government and private lenders can take time when completing the refinance or consolidation process. It is up to the student borrower to ensure the funds make it to the intended destination on time and in full.
If a due date is missed during the refinancing or consolidation process, students may get hit with a missed or late payment on their credit report that is difficult to rectify. Be sure to check with your lender to understand the timeframe for disbursement when refinancing your student loans.
If you are planning to use education loans, or if you are in the process of getting student loans, use this guide to understand your responsibilities as a borrower as well as the expectations you should have for loan disbursement.
The process differs between federal and private student loans, and among various private lenders. Misunderstanding who is paying who, in what amount, and when, can create more of a headache than necessary. Know what to expect from your lender in terms of the disbursement schedule once you are approved for a new student loan to minimize the stress.
Author: Melissa Horton